Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime

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Abstract

This paper investigates the conduct of monetary and fiscal policy
in the post-ERM period in the UK. Using a simple DSGE New Keynesian
model of non-cooperative monetary and fiscal policy interactions
under fiscal intra-period leadership, we demonstrate that the past policy
in the UK is better explained by optimal policy under discretion
than under commitment. We estimate policy objectives of both policy
makers. We demonstrate that fiscal policy plays an important role in
identifying the monetary policy regime.